What are the differences in speculating by buying vs. selling options on a stock index futures...

What are the differences in speculating by buying vs. selling options on a stock index futures such as the Nikkei 225?
What is the difference between writing a straddle and a strangle? Are such trades speculative in nature?

Expert Solution

ANS-1 There are two types of options that are call option and put option. Option buyer have to pay premium and for against that premium they earn right to buy or sell shares at strike price (price fixed earlier) whereas option seller receive the premium against which they have obligation to sell or buy share at strike price if option buyer exercise his right.

call option: a) buyer of call option: Speculate that the price will go upward (i.e spot price will be above the strike price and hence they earn profit from increase in current price). loss is limited to the premium whereas profit is unlimited.

b) seller of call option: Speculate that price of share will go down or will be flat (i.e spot price will be lower than the strike price). Loss for call option seller is maximum whereas profit would be the premium it receives from the buyer of call option.

Put option: a) buyer of put option: Speculate that the price of the share will decline (i.e spot price will be lower than the strike price ) hence they earn profit from decline in price of share. Loss are limited to the premium whereas profit is maximum for option buyer.

b) put option seller: Speculate that the price of the share will increase or be flat (i.e spot price will be more than the strike price). Loss for put option buyer will be maximum whereas profit is limited to the premium.

Nikkei 225 is the index future contract, buyer and seller of index option speculate that the price of index will increase or decrease in the near future. Buyer of index earn profit from the difference in spot price and strike price same as in share options

jeff jeffy answered 1 year ago

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